Bottom-Coding for the Measurement of Global Poverty and Inequality

Distribution sensitive welfare and poverty measures are designed to respond to low values of individual income or consumption. However, very small positive values can have an extreme influence on many distribution sensitive measures, and some measures are not defined for nonpositive values. Although income or consumption is often truncated or bottom-coded at some strictly positive threshold to avoid these difficulties, it is unclear where the threshold should be drawn and data providers follow different practices. This paper systematically explores various options for bottom-coding consumption and income distributions when calculating summary welfare and poverty measures for cross-country and over-time comparisons. Using more than 800 consumption surveys from across the world and employing various methodologies, the paper suggests that $0.25 per person per day in 2017 purchasing power parity is a suitable bottom-coding threshold in this setting